The Federal Reserve’s massive balance sheet expansion has helped some and done little for others. One of those it has helped is Todd Westhus, an investor in Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar.
March 10 (Bloomberg) -By Jody Shenn- Todd T. Westhus is poised to join George Soros and John Paulson with an unlikely wager.
Soros broke the Bank of England in 1992 by betting on the devaluation of the British pound, netting $1 billion. Paulson took home $15 billion, anticipating the collapse of subprime debt that contributed to the financial crisis. Now, Westhus is trying to transform the $9.4 trillion U.S. mortgage market. The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar. Back then, the mortgage giants were just about given up for dead. Today, the companies are profitable and their shares have soared 24-fold.
Taxpayers rescued Fannie Mae and Freddie Mac in 2008 with a bailout that swelled to $187.5 billion, an amount the companies will finish sending back to the government this month. The issue for investors is that the Treasury Department decided in 2012 to keep all the companies’ profits. Perry sued the U.S. in July,saying the money sweep flouts the rule of law. Senator Bob Corker, a member of the Senate Banking Committee, said the firms’ staunchest supporter should be rewarded.
The companies would “be generating not one dime of revenue if it weren’t for the federal government,” Corker, a Tennessee Republican, said in an interview.
The preferred shares of the mega-GSEs have risen with speculation that Fannie Mae and Freddie Mac might survive. Then again, their preferred shares have risen with The Fed’s 3rd round of quantitative easing (QE3). Here is a chart of the preferred share price against The Fed’s Balance Sheet (yellow line).
The Fed giveth, and Corker taketh away.